The BHP Group Ltd (ASX: BHP) share price could be on the move this morning after it was the subject of a bullish broker note out of Goldman Sachs.
What was in the note?
According to the note, Goldman Sachs has upgraded the mining giant's shares to a buy rating from neutral and lifted the price target on them to $41.90.
This price target implies potential upside of 16% over the next 12 months excluding dividends or 22% including them.
The broker made the move after reviewing BHP's oil production. It notes that BHP's conventional oil production has declined 25% since 2009, from a peak of 160 Mmboe to around 120 Mmboe.
However, the broker's analysis of five key greenfield oil projects "shows that BHP could boost oil production by 50% to 180Mmboe by FY30E."
"We value BHP's oil growth projects at US$6.5bn (A$1.8/sh) and the Petroleum division at US$30bn (A$8.3/sh) based on US$60/bbl long run oil. We are most positive on the Trion and Wildling oil and T&T North gas projects. We think oil growth could be a major catalyst for BHP over the next 3-5 years. Our analysis shows the division provides BHP with more stable margins and cash flow vs. mining peers," the broker added.
Also supporting Goldman's decision to upgrade BHP's shares is its strong balance sheet, high levels of free cash flow, and potential shareholder returns. It believes the company is well-placed to provide investors with a fully franked 6% dividend yield in FY 2020.
In addition to this, the broker remains confident that iron ore prices will stay higher for longer and has forecast a 30Mt deficit in 2020. It expects this to send iron ore prices above US$100 a tonne in the fourth quarter of 2019.
Should you invest?
I agree with Goldman Sachs on BHP and believe it would be a good option for investors looking for exposure to the resources sector. I would choose it ahead of Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) at this point on valuation grounds.
